Gold Price and Interest Rate Relationship - How They Affect Each Other

The relationship between interest rates and gold prices is something many investors and analysts keep a close eye on. It’s often thought that when interest rates go up, gold prices will fall as people shift their money into higher-yielding investments like bonds. But the reality is a little more complicated.

For example, while there’s some historical evidence that gold prices can fall when interest rates rise, there are plenty of times when both gold and interest rates increase together. There are also many other factors, like global markets and economic conditions, that influence gold prices in ways that don’t always align with interest rate changes.

In this article, we’ll explore the relationship between gold prices and interest rates, as well as what other factors affect gold prices and why gold is considered a safe-haven investment.

What is the relationship between interest rates and gold prices?

The World Gold Council describes the relationship between interest rates and gold prices as being inverse. This is because when interest rates rise, it’s seen as a sign of a healthy economy. In these environments, investors feel more confident purchasing higher-risk assets like stocks and bonds, which can lead to a decrease in demand for gold. As a result, gold prices tend to fall when interest rates rise.

On the other hand, when interest rates drop, it’s often a sign of economic uncertainty or weak growth. In these situations, investors seek safer assets to protect their wealth, like gold. This shift in demand tends to push gold prices higher.

However, the relationship isn’t always so clear. Historical data shows that while interest rates and gold prices often have a negative correlation, there are exceptions to the rule. For example, despite rising interest rates in 2022 and 2023, gold reached new all-time highs in December 2023. This shows us that gold’s price doesn’t always follow the same pattern as interest rate shifts, especially when other factors – like inflation, economic uncertainty, or market sentiment – are involved.

A historical look at interest rates vs gold prices

Looking at the long-term relationship between gold prices and interest rates shows us that the connection isn’t as solid as some people believe.

Although many investors assume that rising interest rates automatically lead to lower gold prices, a historical analysis shows us that the correlation between the two is relatively weak. In fact, since 1970, the correlation between interest rates and gold prices has only been around 28%, which isn’t considered significant.

Let’s take the 1970s as an example. During this time, both gold prices and interest rates soared. From 1971, when short-term interest rates were at 3.5%, to 1981, when they reached 16%, gold prices experienced an unprecedented increase. During this same period, gold went from being $200 per ounce to nearly $2,000 per ounce, showing that it’s possible for gold prices and interest rates to rise together.

2022 shows us something different, however, when the Federal Reserve began its latest round of interest rate hikes in response to inflation. Initially, gold prices surged in response to geopolitical tensions, like Russia’s invasion of Ukraine. But as the Fed continued to raise rates throughout the year, gold prices fell, dropping from highs near $2,000 per ounce to around $1,630 by autumn. This decline could be a result of investors shifting towards higher-yielding fixed-income investments in the face of rising rates.

But in 2023, gold prices started to recover just as inflation signs began to ease up and the pace of rate hikes was expected to slow. By mid-January 2023, gold reached around $1,900 per ounce. This shows us that the impact of interest rates on gold prices isn’t always so straightforward.

What affects the price of gold?

While interest rates do influence gold, they’re just one piece of a puzzle that includes the U.S. dollar, supply and demand, and geopolitical tensions. Let’s take a look at what other factors drive gold prices.

The U.S. dollar

Gold is primarily priced in U.S. dollars, which means the strength of the dollar can affect gold’s price movements. The relationship between gold and the dollar is typically inverse, meaning gold tends to rise in value when the dollar weakens. This is because a depreciating dollar reduces purchasing power, so more dollars are needed to buy the same ounce of gold – thus driving up its price. For example, when the dollar’s purchasing power decreased in 2024, gold was at all-time high prices.

On top of that, when the U.S. dollar weakens relative to other currencies, investors outside the U.S. can purchase more gold with their own currencies. This drives gold prices up even further. An example of this happened in October 2024, when the euro’s exchange rate against the dollar was 1.08 – coinciding with gold hitting new highs.

See: Is There a Correlation Between the US Dollar and Gold Prices?

Demand for gold

Like any other commodity, gold’s prices are influenced by demand. The demand for gold comes from different sectors, including:

• Jewellery: Jewellery is a significant source of gold consumption. When demand for gold jewellery increases, it can push gold prices up higher. However, jewellery is considered a weak driver of gold prices since most people tend to buy and hold onto it for long periods.
• Gold exchange-traded funds (ETFs): Gold ETFs invest in physical gold bullion or gold mining companies. Increased demand for these alternative investments leads to higher buying volumes, which increases gold prices.
• Central banks: Central banks hold vast gold reserves, and these only seem to be increasing. In recent years, we’ve seen central banks in many BRICS+ nations, like China, Russia, and India, increasing their gold reserves to move away from U.S. Treasuries.
• Industrial demand: Gold is used in numerous industries, including healthcare, electronics, and even space exploration. If these industries expand or increase their use of gold, demand will rise and push prices higher.

Keep Reading: Why Central Banks Buy Gold

Supply of gold

Gold is a finite resource, which means it can’t be replenished quickly. As new gold deposits become harder to find, and mining becomes more expensive, the cost of producing gold also rises. This limited supply can push gold prices higher, especially when demand exceeds available supply.

Some experts predict that gold mining could become unsustainable by 2050. When gold becomes more difficult to source, its prices are likely to increase.

Geopolitical factors

Gold is largely considered a safe-haven asset, which means it tends to perform well during periods of geopolitical instability. When conflicts arise or tensions escalate, investors often turn to gold to protect their wealth. For example, during the Russia-Ukraine conflict in 2022, gold prices rose by 6% as investors sought security in the precious metal.

Keep Reading: What Drives the Price of Gold?

Who determines the price of gold?

No single person or organization dictates the price of gold. Instead, gold prices are shaped by global markets, supply and demand, and financial institutions. That said, there are two primary mechanisms that impact gold’s official pricing: the spot price and the futures market. Let’s take a look at these in more detail.

The role of the London Bullion Market Association (LBMA)

The LBMA plays a key role in setting gold prices. The LBMA Gold Price, often referred to as the London Gold Fix, is published twice daily by the ICE Benchmark Administration (IBA). This process involves a panel of banks and market participants that assess supply, demand, and gold futures derivatives markets to determine a fair market price for gold.

Learn More: LBMA: All You Need to Know

Gold spot price vs gold futures

Gold futures contracts are traded on major derivatives markets, like the Commodity Exchange (COMEX) in the U.S. and the LBMA in the U.K. COMEX and the LBMA make futures contracts with buyers that involve locking in a price for gold for delivery at a specific time in the future.

The IBA combines these futures contracts with supply and demand to determine gold’s spot price, which reflects the real-time market price of unrefined gold. The IBA then sets a price to publish as the LBMA Gold Price.

China’s influence on gold prices

More recently, China has gained more control over global gold pricing and shifted influence away from Western markets. The People’s Bank of China (PBoC) and the private sector have been purchasing gold at unprecedented levels. For example, in 2023 alone, the PBoC acquired 735 tonnes of gold, while private sector imports totalled 1,411 tonnes.

This large-scale buying spree, combined with China’s ambitions to lead a global gold market, has increased the country’s influence on gold markets and pricing.

Why is gold considered a safe-haven asset?

Gold has long been considered a safe-haven asset due to its ability to retain value – or even increase in value – during economic downturns. Unlike stocks and bonds, gold often moves in the opposite direction of traditional financial markets, which can make it a reliable hedge against inflation and market volatility.

Below are some reasons why gold is referred to as a safe-haven asset:

It diversifies investment portfolios

Well-diversified investment portfolios should include assets that don’t move in sync. Gold’s low or negative correlation with stocks and bonds helps investors reduce risk. If the stock market crashes, gold prices often rise or remain stable, helping offset potential losses.

Even if gold doesn’t increase in value, it rarely drops at the same time as stocks, which can make a useful risk-management tool.

It protects against inflation

Gold has historically been a strong hedge against inflation. As the purchasing power of fiat currencies, like the U.S. dollar, decline, investors turn to gold to preserve their wealth. Since gold’s value often rises when inflation increases, it serves as a financial safeguard during times of rising costs and economic uncertainty.

Learn More: Exploring the Role of Gold as an Effective Hedge Against Inflation

It’s highly liquid

Gold’s liquidity adds to its nature as a safe haven. Whether it’s in the form of physical bullion, gold ETFs, or gold mining stocks, investors can easily buy or sell gold in the global markets. Physical gold, especially, is universally valued and can be bought and sold anywhere in the world with ease.

Keep Reading: Everything You Need to Know About Gold ETFs

Invest in a safe-haven asset

Even though gold’s value is shaped by various factors, from interest rates to geopolitical tensions and monetary policy, it remains a reliable store of wealth. Investors around the world turn to gold to protect their investment portfolios, safeguard their wealth, and hedge against inflation and economic uncertainties.

If you’re ready to invest in this safe-haven asset, you're in the right place. At StoneX Bullion, we stock a collection of investment-grade gold bullion bars and gold coins from the most prestigious mints in the world. Explore our collection of gold, silver, platinum, and palladium bullion and start securing your wealth with precious metals.